PropNex Ltd – Earnings almost tripled but outlook cloudy May 20, 2020 246

PSR Recommendation: BUY Status: Maintained
Last Close Price: S$0.515 Target Price: S$0.600
  • 1Q20 PATMI jumped almost 3x YoY to S$7.6mn. It beat our expectations. The growth came from three-fold spike in project marketing (i.e. new launches) revenue.
  • The outlook will be weak for this year. The circuit breaker, weaker economic conditions and higher priced projects will lead to a contraction in the number of transactions. We cut our FY20e earnings by 19%. Earnings impact will only be registered in 2H20e.
  • Net cash continues to pile up to S$89.8mn (+S$10mn YoY) in 1Q20 and almost 50% of the market capitalisation.
  • We maintain our BUY recommendation. Our target price is lowered to S$0.60 (previously S$0.70). The outbreak has tempered any growth expectations we had for the company. PropNex retains a healthy market share of around 50% and we expect dividends (S$13mn p.a.) can be maintained with the large cash hoard of S$89.8mn.

 

The Positives

+ 3x jump in project marketing. As it takes 8 to 12 weeks for revenue from the booking of a new project, the growth this quarter comes from the health project sales in 4Q19. Project marketing accounts for 45% of revenue in 1Q20 (1Q19: 20%). For the Top 3 selling projects in 1Q20 (The M, Treasures at Tampines, Jadescape), PropNex market share ranged from 46% to 60%.

+ Cash keeps piling up. Together with the rise in earnings, cash from operations increased S$8.7mn in 1Q20. Capital expenditure was less than S$100k in 1Q20. Net cash on the balance sheet rose to a record S$89.8mn.

+ Huge operating leverage. The operating leverage of the business was visible this quarter. Gross profits doubled YoY to S$15mn whilst staff cost only increased S$560k (or +17.8% YoY). The rise was due to salary increment and additional 1 headcount to 175.

 

The Negative

– Nil  

 

Outlook

Management shared their outlook of transactions for FY20e. In a nutshell, the estimates are dire:

a. New launches: 1Q20 industry volumes rose 17% YoY to 2149. This will be supportive of 2Q20e earnings. However, FY20e industry transaction volumes may drop by around 20% to 7900*. These are levels worst than the 12 months post July18.

b. Private resale: 1Q20 volumes jumped 12% YoY to 2080 units. The resale market will be even worst hit than new launch. Without viewing the units physically, there is a higher risk for the buyer if there are issues with the unit. Resale units are unlike new launches where developers are reputable and there is the typical 1-year defect liability for developers. Expectations are for at least a 32% decline in transactions to 6100*.

c. HDB resale: 1Q20 volumes rose 22% YoY to 5893 unit and the highest in 9 years (for a March quarter). The circuit breaker will cause some postponement of purchases in the near-term and overall transaction for FY20e could fall by 10% to 21,500 units. We expect these transactions will be need-driven property purchase.

 

*PropNex estimate is a decline of 27% for the combined private resale and new projects from 19,150 units in 2019 to 14,000 units in 2020.

The extent of the COVID-19 circuit breaker impact include suspension of property viewings and marketing roadshows, temporary closure of project sales galleries and delays in new launches.

 

Maintain BUY with a higher target price of S$0.60 (previously S$0.70)

Our target price is lowered as we cut FY20e earnings forecast by 19%. We believe the company intends to position themselves as a high yield paying stock. To maintain dividends at 3.5 cents per annum requires a payout of S$13mn. This is well supported by the cash on hand of $89mn and excludes and further cash generated by the business.

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About the author

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Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has almost 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

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